Source: Credit Suisse Global Investment Returns Yearbook 2013
The US and UK stock markets have experienced
a few instances of dramatic reversals. In the USA,
there was a real capital loss of −67% (1929–32)
followed by a gain of +50% (1933). More recently,
there was a real capital loss of −39% (2008)
followed by a gain of +23% (2009). Similarly, in
the UK, there was a real capital loss of −36%
(1920) that was followed by a gain of +75%
(1921–22). And perhaps most dramatically, there
was Britain’s real capital loss of −74% (1973–74)
that was followed by a gain of +86% (1975).
We therefore check whether the mean reversion
we observe arises because of just
a very few brief historical episodes that may never
recur.
To a considerable extent, the in-sample pattern
of mean reversion in each of these markets is
thus attributable to just a couple of events per
market that occurred over the span of 113 years.
Moreover, collapses in these two markets were
followed by a recovery, and a relatively speedy
one at that. Investors in some other countries
were not so fortunate (think of China, Austria, or
perhaps Belgium). Evidently, the pattern of mean
reversal that we have uncovered is fragile. Even
on an in-sample basis, it depends critically on a
few outlying events.